Euro Under Pressure As ECB Struggle To Maintain Independence

DailyFX

Oct. 8, 2012, 9:15 AM

The Euro struggled to hold its ground on Monday even as European policy makers increased their efforts to tackle the debt crisis, and the single currency may face additional headwinds over the near-term as the threat for contagion continues to drag on investor confidence.

Talking Points

Euro: ECB Will Not Rollover Greek Debt, OMT Remains Under Scrutiny

British Pound: U.K. Softens Stance On Austerity, RSI Approaching Support

U.S. Dollar: Risk Trends To Drive Prices Amid Holiday Trade

Euro: ECB Will Not Rollover Greek Debt, OMT Remains Under Scrutiny

The Euro slipped to 1.2936 as European Central Bank board member Joerg Asmussen reiterated that the ECB would not roll over its holdings of Greek debt, while his colleague Klaas Knot argued that the Governing Council cannot resolve the debt crisis on its own as the governments operating under the fixed-exchange rate system become increasingly reliant on monetary support.

Despite the growing criticism surrounding the ECB's Outright Monetary Transactions program, both central bankers continued to voice their support for the conditionality tied to the unlimited bond-buying program, but the new initiative may only help to buy more time as the periphery countries struggle to get their house in order.

As European policy makers prepare for the EU Summit on October 18-19, headlines coming out ahead of the meeting may continue to sway market sentiment, but the group may fail to restore investor confidence as the fundamental outlook for the region turns increasingly bleak. As the EURUSD continues to come up against the lower bounds of the upward trending channel carried over from the end of July, we may see the pullback from 1.3170 turn into a larger correction, and the pair may threaten the bullish trend from earlier this year as the debt crisis fuels a weakened outlook for the real economy.

British Pound: U.K. Softens Stance On Austerity, RSI Approaching Support

The British Pound tumbled to 1.6021as U.K. Chancellor of the Exchequer George Osborne softened his tone on cutting the budget deficit, and the sterling may face additional headwinds over the next 24-hours of trading as the economic docket is expected to instill a weakening outlook for Britain.

However, as the U.K. appears to be emerging from the double-dip recession, a slew of positive developments should pave the way for a short-term rebound in the exchange rate, and we may see a more meaningful rebound in the exchange rate as the relative strength index on the GBPUSD comes up against interim support around the 43 figure.

Nevertheless, as the Bank of England is expected to complete the additional GBP 50B in quantitative easing by the next policy meeting on November 8, there's budding speculation that the central bank will look to expand its balance sheet further, but the BoE Minutes due out on October 17 may curb bets for additional monetary support as the Monetary Policy Committee scales back its dovish tone for monetary policy. In turn, the British Pound may regain its footing over the coming days, and we may see the GBPUSD make another run at the 1.6300 figure should the central bank strike an improved outlook for the U.K.

U.S. Dollar: Risk Trends To Drive Prices Amid Holiday Trade

The greenback continued to gain ground on Monday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) advancing to a high of 9,927, but we may see the reserve currency consolidate during the North American trade as U.S. traders remain offline in light of the holiday weekend.

As the economic docket remains fairly light for the next 24-hours of trading, we should see risk trends dictate price action across the major currencies, but headlines coming out of the euro-area may continue to drag on market sentiment as European policy makers struggle to meet on common ground. As the EU maintains a reactionary approach is addressing the debt crisis, the heightening threat for contagion paired with the risk for another Greece debt restructuring may continue to sap risk-taking behavior, and the dollar may appreciate further this week as it benefits from safe-haven flows.